My goal here is to educate readers about the state of US economy, our markets and our little slice of heaven here in the North Country. Maybe, just maybe, I'll even entertain you a bit.

Monday, October 12, 2009

Foreclosures moving on up, to the east side.... To a deluxe apartment....

For all of the talk about rebounds in the housing market most people seem to lump all segments of the housing market together. There is little doubt that the low end of the market has seen a serious bump as a result of aggressive lending from FHA (see below), the first time homebuyer tax credit, and short sales that have led to bidding wars on some distressed properties. However, the high end market, though smaller in units but important in dollar value, is starting to show some serious cracks.

"About 30% of foreclosures in June involved homes in the top third of local housing values, up from 16% when the foreclosure crisis began three years ago, according to new data from real-estate Web site Zillow.com. The bottom one-third of housing markets, by home value, now account for 35% of foreclosures, down from 55% in 2006.

The report shows that foreclosures, after declining earlier this year, began to accelerate in the late spring and that more expensive homes have more recently accounted for a growing share of all foreclosures. "The slope of that curve in recent months is much sharper than it was recently," said Stan Humphries, chief economist for Zillow. Rising foreclosures among more-expensive homes could create added pressure for a housing market that has shown signs of stabilizing in recent months as sales of lower-priced homes pick up.Default rates are particularly high and expected to rise on option adjustable-rate mortgages, which allow borrowers to make minimum payments that may not cover the interest due. Monthly payments can increase to sharply higher levels after five years or when the outstanding balance reaches a certain level. A study by Fitch Ratings found that 46% of option ARMs were 30 days past due last month, even though just 12% of such loans have reset to higher monthly payments."

Think about that almost half of option ARMs are past due, but only 1 in 9 has actually reset to a higher monthly payment! How do you think that trend might play out over the next year?

“The hotel industry recovery hit a snag this month, which is common,” said Evangelos Simos, chief economist of e-forecasting.com. “At this point, we still see that the major declines ended in June and believe that will be the true turning point. Yet, with this reading, we are hit with the reality that recovery may be a bumpy ride.”

The probability of business expansion declined to 17.5 percent in September, after reaching 76.1 percent in August.

“The HIP had shown improvements over the previous two months, but we’ve tried to approach those gains with cautious optimism,” said Chad Church, industry research manager at STR. “Over the past months, we saw leisure demand continue to make strides in recovery while business travel maintained its downward trend. Now that the summer travel season has come to an end, we’re waiting to see any signs of life from the business segment.”

This fits with my discussions with business travelers that it is a ghost town out there. Hotels, restaurants, bars that used to be packed with business travelers are now struggling to keep the lights on. Watch for more developments here (or consider booking a hotel this fall, there are some decent deals out there).

“F.H.A. has stepped into the void left by the private market,” Representative Maxine Waters, Democrat from California, said at the hearing. “Let’s be clear; without F.H.A., there would be no mortgage market right now.”

That was the case for Bernadine Shimon. Like many Americans, Ms. Shimon has recently been through some rough times. She lost a house to foreclosure, declared bankruptcy, got divorced and is now a single mother, teaching high school English in a Denver suburb.She wanted a house but no lender would touch her. The Federal Housing Administration was more obliging. With the F.H.A. insuring her mortgage, Ms. Shimon was able to buy a $134,000 fixer-upper in August.

“The government gave me another chance,” she said.The F.H.A. is insuring about 6,000 loans a day, four times the amount in 2006. Its portfolio is growing so fast that even F.H.A. backers express amazement. Any more than that and Ms. Shimon, 45, would still be a renter. As it was, she cashed in her retirement savings account to come up with the necessary funds. She did not have enough to spare for closing costs, so her mortgage broker arranged a deal where the charges were wrapped into the loan at the cost of a higher interest rate. She cried when the deal was done.The house was empty and trashed. Slowly, she is trying to bring it back to life. She spent the first few weeks picking up garbage in the backyard.

Is Ms. Shimon a good bet? Even she has no easy answer. Her mortgage payment, $1,100, is half of what she takes home every month. It is not easy to make ends meet. Teachers can get laid off like everyone else.

“The government,” she said, “is doing what it needed to do — taking a risk on people.”

Chaz Fullenkamp, an automotive technician in Columbus, Ohio, got an F.H.A. loan even though he was living on the financial edge. “If I got unemployed, I’d be wiped out in a month or two,” he says. Thanks to the F.H.A., however, he is better off than he used to be.

Mr. Fullenkamp used F.H.A. insurance to buy a house this spring for $179,000. The eager seller paid the closing costs and also gave Mr. Fullenkamp $2,500 in cash. He immediately applied for the $8,000 tax rebate. Even taking his down payment into account, he came out ahead.

“I knew in my heart I could not really afford the house, but they gave it to me anyway,” said Mr. Fullenkamp, 22. “I thought, ‘Wow, I’m surprised I pulled that off.’ ”

Have we really learned nothing? 50% of your take home as a mortgage payment? Loans to 22 year olds that have a financial safety net of a month or two? Sounds like the makings of another crisis. I wonder if the head of FHA has his testimony for Congress prepared..."No one could have foreseen that a 22 year old that put down $6k on a $180k house (when the government gave him $8k) and a month of financial security would be a bad credit risk".

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About Me

I grew up in La Fargeville before attending college in Manhattan and ultimately working on Wall Street for about 10 yrs. I left NYC/NJ in 2003 and relocated my family to the beautiful waterfront of Clayton, NY. I spend my days caring for my 2 daughters and dabbling in the markets.